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CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has assigned a 'BB+' rating to Frontier Communications Corporation's (Frontier) (NYSE: FTR) proposed offering of $500 million of senior unsecured notes due 2021. Frontier will use the proceeds to partially tender for its 2014 8.25% notes due 2014 and 7.875% notes due 2015, of which there are $600 million and $500 million outstanding, respectively. Fitch's Issuer Default Rating (IDR) on Frontier is 'BB+', and the Rating Outlook is Stable.

Frontier's 'BB+' IDR reflects the meaningful improvement in its credit profile following the acquisition of access lines in 14 states from Verizon on July 1, 2010. Frontier has articulated a long-term leverage target of approximately 2.5 times (x). The company is still above this target as gross debt-to-EBITDA for the last 12 months ending March 31, 2012 was 3.4x. In 2012, Fitch expects leverage to improve to 3.3x, pro forma for the repayment of a $580 million maturity in mid-January 2013.

Fitch believes Frontier's 47% dividend reduction in February 2012 affirms management's commitment to improving its longer-term leverage metrics. The reduction is expected to save $348 million on an annual basis.

In Fitch's view, Frontier's credit metrics have the potential to strengthen, but improvements will be restrained through 2012. An Outlook revision to Negative may result if the company's leverage metrics do not improve from year-end 2011 levels of 3.4x after the line integration is completed and if the company does not show continued progress in growing revenues from business and data services. To accomplish the latter, Fitch believes an improvement in the performance of the former Verizon properties under Frontier's rurally-focused business model will need to be demonstrated.

Ongoing competitive pressures are also factored into the ratings of Frontier. Its operations are showing a slow and relatively stable rate of decline due to competitive pressures and technological substitution; the sluggish economy is also having an effect. The marketing of additional services - including high speed data - as well as cost controls have been mitigating the effect of access line losses to cable operators and wireless providers. Recently announced regulatory reforms are not expected to have a significant impact on the company in the near term.

Frontier has ample liquidity which is derived from its cash balances, its $750 million revolving credit facility, and, on a forward basis, FCF. At March 31, 2012, Frontier had $366 million in cash and an additional $139 million of restricted cash was available to fund certain capital expenditures. Over the last 12 months, FCF after dividends was a negative $59 million. FCF in the period was pressured by the timing of working capital needs due to the system conversion and broadband buildout as well as integration and accelerated broadband capital spending.

As a result of the effect of the dividend reduction in 2012, Fitch expects FCF to improve materially, given the lower dividend will reduce dividend requirements by $348 million annually. Fitch expects 2012 FCF to be in a range of $360 million to $400 million after dividends and integration expenses. FCF expectations reflect Frontier's capital spending guidance of $725 million to $775 million plus integration capital spending of $40 million. Capital spending is expected to decline by $100 million in 2013 as the broadband expansion is completed.

Liquidity is provided by a $750 million senior unsecured credit facility, which is in place until Jan. 1, 2014. The $750 million facility is available for general corporate purposes but may not be used to fund dividend payments. The main financial covenant in the revolving credit facility requires the maintenance of a net debt-to-EBITDA level of 4.5x or less during the entire period. Net debt is defined as total debt less cash exceeding $50 million.

Frontier has $94 million due in 2012, $639 million in 2013 and $658 million in 2014. Fitch expects the company to use cash balances to repay the 2013 maturity, and the 2014 maturity will be reduced by the tender offer.

The company's $100 million unsecured letter of credit facility matures Sept. 20, 2012. The facility has no financial ratio covenants, and other negative covenants are similar to those in its revolving credit facility. A letter of credit was issued to the West Virginia Public Service Commission to guarantee capital expenditure commitments in the state with respect to the acquisition of the Verizon lines.

Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Rating Global Telecoms Companies' (Sept. 16, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]

Rating Global Telecoms Companies - Sector Credit Factors

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205 ]

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